Introduction
Transfer Pricing, Procedural Rights and a Missing Draft Order
This ITAT Bangalore judgment revolves around a simple but powerful question: when a tax authority re-opens and re-examines a case on the orders of a higher court, does it still have to follow the same procedural steps as the first time? For Mphasis Limited, a major Indian IT company, the answer to that question made all the difference.
This case is relevant for anybody who wants to resolve any issues of transfer pricing in India. Transfer pricing, put simply, is a system under which an entity determines how much it will charge other entities owned by the same owner, such as a parent company determining how much it will charge its subsidiary for services. According to Indian tax laws, these amounts must be arm’s length amounts, or amounts that could be charged in an open marketplace between two unconnected parties. If there are no such arm’s length amounts, then a transfer pricing adjustment becomes necessary..
This particular ITAT judgment bangalore shows that even if there are legitimate transfer pricing disputes, a procedural violation by the tax department can render the entire assessment order invalid. This is a powerful case law in Bangalore that taxpayers especially multinational companies with complex transfer pricing arrangements must be aware of.
Facts of the Case
What Actually Happened: The Story behind the Numbers
The parent company of the group of Mphasis companies is called Mphasis Limited. It is one of the most renowned companies offering software solutions and IT-related services. They have been classified according to the type of business that they do. The three classifications are software solutions, BPO, and ITO.
The total income of Mphasis for the Assessment Year 2010-11 is estimated to be around Rs 288 crore. After merging with another company, a revised return was filed in November 2011 declaring Rs. 289 crore. The return was selected for scrutiny, and the transfer pricing aspects of the company's international transactions were examined.
Mphasis had applied the Transactional Net Margin Method (TNMM) a widely accepted method under Indian transfer pricing rules to benchmark its transactions. The Transfer Pricing Officer (TPO) initially agreed that most transactions were at arm's length. However, two specific transactions were separately benchmarked and found wanting:
- Networking Charges: Rs. 22.75 crore was adjusted on account of networking charges paid to group companies.
- Interest on Overdue Receivables: Rs. 92.33 lakh was added as interest on outstanding amounts due from associated enterprises beyond the permitted period treated as a separate international transaction requiring a transfer pricing adjustment.
- Total Transfer Pricing Adjustment: Rs. 117.20 crore a significant sum added to the company's declared income.
In addition to these transfer pricing issues, the Assessing Officer (AO) also disallowed Rs. 239.51 crore claimed as a deduction under Section 10A of the Income Tax Act (a tax holiday provision for export-oriented IT companies), and an excess depreciation claim of Rs. 63.38 lakh.
The first Assessment Order was passed in January 2015, fixing Mphasis' total income at Rs. 636.30 crore significantly higher than what the company had declared. This is the starting point of a long legal journey that eventually led to this important ITAT judgment in bangalore.
Timeline of Events
October 2010 — Mphasis files its original income tax return for AY 2010-11 declaring Rs. 288 crores.
November 2011 — Revised return filed post-merger, declaring Rs. 289 crore.
December 2014 — Dispute Resolution Panel (DRP) issues directions granting partial relief to Mphasis.
January 2015 — Final Assessment Order passed; total income determined at Rs. 636 crore.
June 2021 — ITAT Coordinate Bench partially remands the case back to AO, TPO and DRP for fresh consideration.
January 2024 — TPO re-determines interest adjustment at Rs. 31.34 lakh. No draft order is issued by the AO.
March 2024 — DRP issues fresh directions. AO directly passes a final Assessment Order fixing total income at Rs. 635.06 crore without issuing a draft order first.
April 2026 — ITAT Bangalore judgment quashes the March 2024 order and allows Mphasis' appeal.
Decision
What the Tribunal Said and Why It Matters for Transfer Pricing
At the heart of this ITAT judgment bangalore is Section 144C of the Income Tax Act. This section was introduced specifically to protect taxpayers particularly foreign companies and those involved in international transactions from arbitrary or incorrect tax assessments. It requires the Assessing Officer to first issue a draft assessment order, not a final one. The draft gives the taxpayer an opportunity to raise objections before the Dispute Resolution Panel (DRP), which then gives binding directions to the AO. Only after this process can the AO issue a final order.
The core issue in this transfer pricing case is that when the earlier ITAT bench remanded certain issues back to the AO and TPO for fresh consideration, the AO was legally required to restart this process meaning he had to issue a fresh draft assessment order first. Instead, the AO jumped directly to a final order, bypassing the draft stage entirely.
What the Law Requires vs. What the AO Did
- Section 144C requires: The AO must first issue a draft assessment order. The taxpayer then has the right to approach the DRP with objections. The DRP's directions are binding on the AO. Only then can a final order be passed.
- What the AO did in this transfer pricing case: Passed the final order directly without issuing any draft order after the ITAT remand.
- Mphasis' argument: This directly violates Section 144C and the binding precedent set by the Karnataka and Delhi High Courts.
- Revenue's argument: Since the ITAT had already remanded issues to the DRP directly, there was no need for a separate draft order. The DRP's directions were already in place.
The Tribunal examined this carefully. On the Revenue's argument, the ITAT agreed on one narrow point when a higher forum mistakenly remands issues directly to the DRP (instead of routing through the AO), and the DRP has already issued its directions in line with the ITAT's own order, issuing a fresh draft order would serve no purpose and would be, in the Tribunal's words, unnecessary and a judicial waste.
However and this is the critical point in Mphasis' case, the earlier ITAT bench had not only remanded to the DRP. It had also remanded certain issues to the AO and TPO directly. Once any issue is remanded to the AO or TPO, the AO is absolutely required to issue a draft assessment order before finalizing anything. This is non-negotiable, as confirmed by the Delhi High Court in the case of Principal Commissioner of Income Tax vs. Sumitomo Corporation India Private Limited, which the Tribunal relied upon as a binding precedent in this ITAT case law.
The Tribunal also laid down a broader principle valuable beyond this specific transfer pricing dispute: appellate forums should ideally never remand cases directly to the DRP. The correct and legally sound approach is to always remand to the AO. The DRP's role is to issue binding directions to the AO it is not an authority that higher courts or tribunals should address directly. This is a significant principle established through this ITAT judgment bangalore.
Conclusion
Procedure Protects the Taxpayer
The ITAT Bangalore Judgment, in this landmark ITAT case law, quashed the Assessment Order dated 30th March 2024 and allowed the appeal filed by Mphasis Limited. The entire final assessment based on a total income determination of Rs. 635.06 crore was set aside simply because the AO bypassed the mandatory draft order requirement.
This ITAT judgment in bangalore sends a clear and firm message: procedural safeguards under Section 144C are not optional formalities. They exist to protect taxpayers from unilateral and unchecked tax demands, especially in complex transfer pricing matters. Even when a case comes back to the AO on remand from the ITAT, the taxpayer's right to approach the DRP with a fresh set of objections cannot be taken away.
For businesses particularly multinational companies dealing with transfer pricing assessments this case law in Bangalore is a vital reminder that due process is a two-way obligation. The tax department must follow it, and taxpayers must actively assert their rights when it is violated. As this ITAT judgment bangalore demonstrates, an entire assessment order can fall not because the numbers are wrong, but because the process was bypassed.
Key Takeaways from This Transfer Pricing Case
- When ITAT remands directly to the DRP and the DRP has already acted in line with ITAT's directions, no fresh draft order is needed but this is a narrow exception, not the rule.
- Higher forums should always remand to the AO not the DRP to avoid procedural complications.
- Skipping the draft order stage renders the final assessment legally unsustainable and liable to be quashed in its entirety.
- This ITAT judgment bangalore reaffirms that transfer pricing taxpayers cannot be denied the right to approach the Dispute Resolution Panel, regardless of the stage of proceedings.
Final Outcome
Appeal Allowed. Assessment Order Quashed.
The Income Tax Appellate Tribunal, Bangalore ('C' Bench) allowed the appeal of Mphasis Limited in this ITAT judgment bangalore for Assessment Year 2010-11. The final assessment order dated 30th March 2024 was held to be procedurally invalid and was set aside in its entirety. The Tribunal held that the Assessing Officer's failure to issue a draft assessment order before passing the final order following ITAT-directed remand was in direct violation of Section 144C(1) of the Income Tax Act, confirming it as a significant case law in Bangalore on transfer pricing procedural right.